Katanga Mining what's wrong?

Investors following Katanga Mining Ltd. are all wondering the same thing: Just what the heck is going on?

At the end of March, shares of the copper miner, which operates in the Democratic Republic of the Congo, were selling at 77¢ each, about the middle of their trading range over the prior several months.

But since the start of April, the stock has gone on a completely unexplained run. It hit a high of $1.66 last week, and the company now has a market value north of $2.5-billion. The average daily trading volume in April is almost quadruple the six-month average.

According to experts, this stock move defies logic.

"When you look at their production profile and cost structure going forward, a $2.5-billion market cap is certainly well out of line with other companies," said Dave Davidson, an analyst at Paradigm Capital. His most recent price target on the stock was 50¢.

Regulators are curious as well. Last week, Katanga responded to a TSX market surveillance inquiry by saying it was unaware of any reason for the leap in its stock price.

That has prompted speculation about what could be behind the move, particularly given the political turmoil in the DRC and Katanga's own checkered history.

In early 2009, the company was facing a severe liquidity crisis, and had to accept an emergency convertible loan from Glencore International AG. Glencore, a secretive Swiss commodities trader, ended up with most of Katanga's shares, and other investors suffered extreme dilution.

Four weeks ago, Glencore increased its stake by another 5.2% by re-purchasing shares from Israeli businessman Dan Gertler, who has a long history of business dealings in the DRC. Glencore now owns 74.4% of the company, and Mr. Gertler remains the second-largest shareholder.

Glencore's latest move raised speculation that it will look to eventually take over the whole company, sources said. Other rumours suggest that Glencore is looking to sell Katanga, likely to a Chinese buyer. However, the motivations of Glencore and Mr. Gertler are completely unclear.

China has already received two key mining concessions that used to belong to Katanga, and it has a massive US$9-billion resources-for-infrastructure deal with the Congolese government.

"Really the only ones that would pony up that kind of money would have to be the Chinese, given the risks," said one source, who asked not to be named.

The risks come from the DRC government. The DRC has always been a volatile place for mining companies to do business, but the government still shocked the industry last year when it expropriated the Kolwezi copper project from First Quantum Minerals Ltd., another Canadian mining company. Then last month, a DRC court demanded that First Quantum and its partners pay an outlandish penalty of US$12-billion related to Kolwezi. That case is now heading to international arbitration.

The First Quantum situation has cast a black cloud over the DRC, raising even more questions about why Katanga shares keep moving up.

"I think there's a lot of political mystique going on rather than actual fundamentals for the company," Mr. Davidson said.